U.S. Energy Becoming a Growth Sector at $50-a-Barrel Oil

It’s been a tough year for energy. Excuse us, it’s been a tough three years.

Despite signs that the global oil markets are finally rebalancing, energy market sentiment remains in the doldrums and energy equities are trading at decade-low prices relative to the broader market. While we read articles postulating “lower for longer” or “the end of oil,” the reality is that the ongoing technological progress exhibited by the U.S. energy industry has created a new structural platform for potential growth.

In short, investors have yet to recognize that even at $50 per barrel (/bbl) there are growth opportunities across the upstream, midstream, downstream and services subsectors of the U.S. energy industry.

Energy Growth Will Span the Value Chain

Upstream

Sure, every energy investor would love to have the tailwind of rising commodity prices. However, don’t lose sight of the fact that margin capture is the name of the game for producers. Part of the reason crude oil is having trouble breaking through $50/bbl is the prospect of restarting U.S. shale growth. And the adoption of “big data” technologies in the oil patch is expected to further lower U.S. shale break-evens.

However, we believe the market has yet to give much credit to the benefit of these efficiency improvements. For the highest-quality producers, the acceleration of drilling may lead to an inflection higher in corporate returns, even on a flat oil price. For some perspective on how much runway shale producers have for growth, analysts at Raymond James & Associates are modeling 200,000 “core” oil drilling locations in the U.S. – this equates to about 20 years of inventory at the current drilling pace.

Midstream

Given that fear of U.S. volume growth appears to be the primary driver of negative crude oil price sentiment, the underperformance of the midstream sector is particularly shortsighted, in our view. Unfortunately, Plains companies’ (NYSE: PAA and NYSE:PAGP) troubled high-profile second-quarter update stole investor focus in recent weeks. Plains’ issues proved to be primarily Plains-focused, as most operators reported a healthy quarter and improved confidence on forward expectations as volumes continue to improve.

As detailed in our June blog, we continue to believe many investors are overlooking the improving outlook for logistics assets needed to support the U.S. volume growth story. Importantly, many of the big-ticket projects connecting shale basins to refineries and export outlets have already been paid for, with $140 billion of capital deployed over the last five years. As a result, we believe many midstream companies are on the cusp of an inflection in distributable cash flow, as higher volumes translate into increased utilization across existing pipelines/storage/processing assets.

Downstream

Oil consumers have been the clearest beneficiaries of this lower oil-price world, as evidenced by U.S. vehicle miles traveled reaching all-time highs again this summer. While the adoption of electric vehicles (EVs) is an attention-grabbing, long-term theme, even the most aggressive EV sales forecasts, if realized, would create only a slow and marginal impact on worldwide oil demand over the next decade. Consumer preferences continue to favor traditional powertrain engines in higher-growth emerging markets. For example, the sale of cheaper, less fuel-efficient sport utility vehicles in China has increased five-fold in the past five years and now account for close to 40% of sales. This compares with a mere 1.3% market share for EVs.

All told, in our opinion, these trends point to a resiliency in global oil demand growth that is often underestimated by generalist investors. From the perspective of feedstock consumers, both U.S. refineries and petrochemical complexes sit near the low end of the global cost curve, which provides an opportunity for increasing exports of gasoline/diesel and/or plastics.

Services

We believe certain oilfield services companies can do just fine in the current price environment as well. Much of the new oilfield technology is focused on optimizing the completion of a well or, eventually, a dozen-plus horizontal wells across several vertical horizons that optimally drain oil and gas from an entire acreage block. The industry will have to spend more service dollars as it moves towards new cutting-edge completion designs, and oilfield pricing needs to move higher to support the necessary equipment-rebuild cycle.

Shale to Drive U.S. Energy Sector Growth

While the equity markets have seemingly left energy stocks for dead, we believe that the U.S. has positioned itself to emerge as one of the few growth areas in a lower oil-price world. Specifically, U.S. shale is poised to steadily gain market share over the coming decade as it benefits from both competitive break-evens and a much shorter lead-time from investment to production. Therefore, even in a $50/bbl oil environment, we see these structural growth tailwinds benefitting the entire energy value chain.

We believe the SteelPath Panoramic Fund, which invests across these energy subsectors, as well as our core midstream-focused funds, are well positioned to benefit from these dynamics.

By reading this blog, you accept the Terms of Use and PRIVACY POLICY/TERMS OF USE.

OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.

The mention of specific companies does not constitute a recommendation by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of the companies mentioned. Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.

Small company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a small company, if any gain is realized at all. Investments in securities of growth companies may be volatile. Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. The Fund may invest no more than 25% of total assets in MLPs. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. The Fund is classified as a “non-diversified” fund and may invest a greater portion of its assets in the securities of a single issuer.

These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.

This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Clients should contact their own legal or tax advisors to learn more about the rules that may affect individual situations.

This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.

Investing involves risks including possible loss of principal.

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's
investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses
contain this and other information about the funds, and may be obtained by asking your financial
advisor, visiting oppenheimerfunds.com, or calling 1.800.525.7040.
Read prospectuses and summary prospectuses
carefully before investing.